The Effects of Cultural Diversity on Innovation and Public Provision of Schooling: Evidence from Nineteenth Century Prussia

Tasks

A growing body of literature studies the costs and benefits of cultural diversity. On the one hand, cultural diversity may increase productivity due to complementarities in the specialization of different ethnic, linguistic, and religious groups. On the other hand, diversity may lead to lower redistribution and under-provision of public goods due to divergent preferences. This project aims to provide new empirical evidence on the costs and benefits of cultural diversity in the specific setting of nineteenth century Prussia.

Methods

The first objective is to investigate the role of cultural diversity in innovation, and particularly the effect of religious diversity on patenting activity. Prussia constitutes an ideal laboratory to study the effect of religious diversity on innovative activity. For historical reasons such as the Reformation in the sixteenth century and the Partitions of Poland at the end of the eighteenth century, Prussia is characterised by a pronounced religious and ethnic heterogeneity due to the cohabitation of protestants, catholics, and jews (plus other smaller religious groups). Using census data at the county level on the religious composition of the population in 1816, we can identify exogenous variation in religious diversity in 1871 and thus to estimate its causal effect on innovative activity. Innovative activity is measured by the number of valuable patents granted to firms and individuals between 1877 and 1890.

The second objective of this project is to shed light on the mechanisms behind the effect of diversity on innovative activity by using data on the religious composition of dozens of industries reported in the Prussian occupational census of 1882. This allows us to understand whether the complementarities between different cultures only have a positive effect on innovative activity for specific industrial sectors. In addition, we will also investigate the existence of spillover effects. More specifially, we will test whether cultural diversity functioned as a channel for spillover of technological knowledge and analyse to what extent diversity helped the diffusion of technology across technologically and geographically-related industries.

Results

We find a strong and robust positive relationship between religious diversity and innovative activity. Our results indicate that the relationship between religious di-versity and innovative activity is non-linear with decreasing marginal returns. Esti-mates of different econometric models suggest that the effect of religious diversity is causal. As far as the mechanism is concerned, we find that religious diversity has a positive impact on industrial diversification. Furthermore, the positive effect of reli-gious diversity is mostly relevant for innovation by large firms and in counties with a relatively higher level of human capital. In short, our findings are consistent with the notion that diversity and openness are important drivers of innovation and have a strong complementarity with human capital.